Want to pay $2 a gallon for gas? Find a buddy to carpool with to work. If you can find 3 people you pay $1.33.
I only drive 2 miles so it doesn’t work for me, but driving only 2 miles the gas money to drive to work isn’t a big deal.
Why oil prices will tank
Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong. Housing’s boom-and-bust cycle tells you why.
By Shawn Tully, editor at large
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NEW YORK (Fortune) – High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.
Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the “world has changed,” and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.
But if you stick to basic economics, it’s clear that the only question is when - not if - prices will succumb.
The oil bulls are correct in their explanations of why prices have jumped. It’s indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It’s also true that most of the world’s reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.
But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that’s destined for a steep fall.
In a normal oil market, the cost of producing the last, most expensive barrel of oil needed to satisfy worldwide demand sets the price for every barrel the world over. Other auction commodity markets work much the same way.
So even if Saudi Arabia produces at $4 a barrel, if the final, multi-millionth barrel required to heat houses and run cars costs $50, and is produced, for argument’s sake, at a flagging field in West Texas, the world price is $50. That’s what economists call the equilibrium price: It’s where the price that customers are willing to pay meets the production cost, including a cushion, naturally, for profit or “the cost of capital.”
But today, the sudden surge in demand and the production bottlenecks have thrown the market radically out of balance.
Almost exactly the same thing happened in the housing market. And both housing and oil supply react to a surge in demand with a long lag. In housing, the lag is caused by restrictive zoning and development laws, especially in coastal markets like California and Florida.
So when the economy roared back in 2002 and 2003, builders couldn’t turn out homes fast enough for buyers armed with those cheap mortgages. As a result, prices spiked. They no longer bore any relation to the actual cost of buying and improving land, or constructing and marketing a new house (at some reasonable profit margin). Instead, frenzied buyers were setting the price.
Because builders were reaping huge windfall profits, they rushed to buy and develop land. And sure enough, those new houses were ready just as buyers were retreating to the sidelines because they could no longer afford to buy a home. That vast overhang of unsold homes is what’s driving down prices today.
The story is much the same with oil, with a twist. A big swath of the market isn’t really paying that $125 a barrel number you hear about seemingly every hour. In China, India and the Middle East, governments are heavily subsidizing oil for their consumers and corporations, leading to rampant over-consumption - and driving up prices even more.
But sooner or later the world won’t keep paying those prices: Eventually, the price must fall back to the cost of that last barrel to clear the market.
So what does that barrel cost today? According to Stephen Brown, an economist at the Dallas Federal Reserve, that final barrel costs just $50 to produce. And when the price is $125, the incentive to pour out more oil, like homebuilders’ incentive to build more two years ago, is irresistible.
It takes a while to develop new supplies of oil, but the signs of a surge are already in place. Shale oil costing around $70 a barrel is now being produced in the Dakotas. Tar sands are attracting investment in Canada, also at around $70. New technology could soon minimize the pollution caused by producing oil from our super-plentiful supplies of coal.
“History suggests that when there’s this much money to be made, new supplies do get developed,” says Brown.
That’s just the supply side of the equation. Demand should start to decline as well, albeit gradually.
“Historically, the oil market has under-anticipated the amount of conservation brought on by high prices,” says Brown. Sales of big cars are collapsing; Americans are cutting down on driving. The airlines are scaling back flights.
We’ve learned another important lesson from the housing market: The longer prices stay stratospheric, the worse the eventual crash - simply because the higher the prices and bigger the profit margins, the bigger the incentive to over-produce.
It’s even possible that, a few years hence, we could see a sustained period of plentiful oil supplies and low prices, meaning $50 or below.
A similar scenario occurred following the price explosion in the 1970s and early 1980s. The price spike caused the world to cut back sharply on oil consumption. By the mid-80s, oil prices had fallen from almost $40 to around $15. They remained extremely low for two decades.
It’s impossible to predict how the adjustment this time will take shape, just as it was in housing. There the surge in supply came in places the experts swore there was “no supply,” and wouldn’t be any. Builders found a way to extend vast tracts of homes into California’s Inland Empire and Central Valley, and even build “in-fill” projects near the densely-populated coasts.
An earlier bubble is also instructive. In the early 1980s silver prices jumped from $10 to $50 on the theory that the world was facing a permanent shortage of silver. Suddenly ads appeared asking homeowners to bring their tea sets and jewelry to Holiday Inns for a big price. Silver supplies poured from seemingly nowhere, out of America’s cupboards, of all places.
And so it will be with oil. We don’t know where the new abundance will come from, from shale, or tar sands or coal or an OPEC desperate to regain market share. We just know that it will appear. With prices like these, it always does.
Weeeeee! 134!
Fucking schitzofrenic traders. “OMG A REPORT CAME OUT BUY BUY BUY OMG AN ARAB SNEEZED SELL SELL SELL OMG A BUNNY OMG A NEWS CLIP SAID WE’RE OUT OF OIL BUY BUY BUY OMG!”
ugh…just paid $61…for 3/4 of a tank…in a car. Not a truck…not an SUV…a car.
Your car must have a big-ass tank.
It’s only costing me about $10-$15 a week more than it did this time last year.
250-300 miles per 10 gallons depending on how/where I drive. If I’m in the hills a lot I get less, if I am cruising highway, I see about 30 mpg. I usually fill up once every 5 days.
I also have never put more than 12 gallons (on a 14 gallon tank) in as my guage is not accurate below a half tank.
18 gallon tank, only takes 93 octane, normal driving gets about 16mpg
lol I bet it’s costing everyone roughly, er, exactly 33% more than it did when gas was $3/gallon.
i wish that were so…
$4.45/gallon for the good stuff…i remember when race fuel was less lol…
Meh even though I am back and daily driving a car that gets about 12-14mpg I am still not ready to be upset about gas prices. In fact I am much more concerned with what high oil prices do to my portfolio then what I pay at the pump. All in all I still say it is just something for the uninformed to cry about.
Word.
I’d much rather bitch about the cost of a gallon of locally produced (Upstate Farms) milk.
Eff that noise.
And what about 20oz. bottles of soda! That is just over $6 a gallon, or more depending where you get it.
the more gas goes up, the more milk goes up.
The more diesel goes up, the more everything else goes up and the better chance my job security goes away. Fortunly it seems like diesel has leveled a little bit so trucking companies are actually starting to buy parts again.
The more everything goes up. The price of oil can be linked to almost everything we use on a day to day basis becaus of either shipping costs or because it’s the base for products we use like plastics.
^ word
Do you know how much garbage bags are? That shit costs ~$6 now, whereas they were $3.50 a few months back.
Pretty soon they’ll cost too much to throw out.
shit, at that point you’re probably better off just throwing the trash directly into an old can outside without a bag
Hence where I said locally produced.
I get the high cost of shit being transported a long distance, but damn, Upstate Farms is local. It shouldn’t rise at the rate it has.